RMB Internationalization's Coming Along Fine, TY

This is a short follow-up to a post I recently made about how the RMB was becoming more integrated into the global SWIFT interbank transfer system as well as the emergence of RMB libor creating reference rates for yuan-denominated borrowing. All point towards inroads the renminbi is making towards becoming a global reserve currency. Today's post dwells on the recent figures for the Hong Kong-based offshore renminbi market. To be sure, the headline numbers are mixed but positive overall. Yuan offshore holdings that usually show some variability are down (a negative for the store of value function), but there is a marked and steady increase in yuan-denominated trade (a positive for the unit of exchange function). From our friends over at Reuters:

While CNH deposits in Hong Kong banks fell by more than 6 percent to 588 billion yuan at end-December from the previous month, trade settled in renminbi logged a remarkable 239 billion yuan. That is the highest monthly volume [since] June 2009, when Beijing began an experiment to denominate more of its trade in the Chinese currency.

The numbers suggest that the offshore yuan market is now being used not just by smart mainland importers looking to boost their profit margins by arbitraging between the two markets, but as a viable trade channel by exporters and importers. And more "two way" yuan flows between the onshore and offshore markets via trade channels and increased usage of direct investment channels signal a rising level of maturity of the CNH market.

"The renminbi is now increasingly being used in the real economy than just for arbitrage purposes [through the difference in the onshore and offshore yuan exchange rates] between the borders which is a healthy sign for the longer-term growth of the market," said Becky Liu, a strategist at HSBC in Hong Kong.

The increased use of yuan in trade or the current account coincides with long-awaited reforms on the capital account including the launch of a sizeable 20 billion yuan cross-border investment scheme in December and relaxing rules on yuan foreign direct investment. Officials from the Hong Kong Monetary Authority say the export-import mix of cross-border yuan trade has reached a balanced level from the 1:3 ratio seen in the second half of 2010, HSBC analysts wrote in a note [my emphasis].

The changes couldn't have come at a better time. Yuan gain expectations have decreased noticeably and CNH trades in Hong Kong are more volatile, increasing pressure on authorities to allow offshore investors more access to the mainland markets to ensure the yuan internationalisation experiment doesn't falter.

Since yuan FDI rules were first announced in mid October, a total of 21 billion yuan in 10 projects have been approved until end-December and total CNH loans has grown to more than 25 billion yuan by end-November from nowhere a few months earlier. All of which will increase the cross-border flow of money, deepening the CNH market, but will also slow the growth in offshore yuan deposits, which has grown by a factor of ten in only two years.

Credit Agricole expects the pool of CNH deposits in Hong Kong to rise to only 610 billion by end 2012, marginally higher than the 588 billion at the end of 2011. "The negative headline such as decline in deposits is more of a short-term nature, and might not make the regulators overly concerned about the situation," HSBC's Liu said. She expects the speed at which authorities have been moving to support the offshore market and open the capital account to continue.

At first I too was rather sceptical about the idea that the renminbi would supplant the dollar's role in a decade's time. But, with such rapid gains, who knows? It's the same story with growth figures with the PRC posting lurid numbers year in and year out. Surely both the Chinese currency and economy can surpass their American counterparts in the matter of a few decades if they keep up this torrid pace?